Divorce Tax Tips that Will Save You Big

Being a newly divorced, former tax preparer, I knew completing my tax return this year would be very different than in previous years. Rules regarding divorced and separated individuals are complicated, especially if you have kids. If you are not willing to put in the time, preparation, research, and diligence to do it yourself, you should seek out an experienced tax professional to help, at least for the initial year of your divorce.

But if you're like me and don't want to pay someone to do this for you, the following strategies should help. But please, get yourself a copy of Publication 504 (Divorced and Separated Individuals) and get very familiar with it before you start. It's available at www.irs.gov or at any IRS Taxpayer Assistance Center. And you must commit yourself to put in the time required to research all the options, not just those highlighted here. If you're not scared off yet, let's get started.

Filing Status

Generally, divorced people will file as Single. However, if you are divorced and at least one of your kids lived with you, you are a custodial parent and will most likely be able to file as Head of Household. The Head of Household status will almost always result in a much lower tax bill, so don't overlook this.

Separated people can file as Married Filing Separately or Married Filing Jointly. Married Filing Jointly is almost always the most beneficial status. The catch is that both you and your estranged spouse must sign the return. So if you just cannot be in the same place with each other you might have to file Married Filing Separately, which is the least beneficial filing status.

Dependents

Generally, the custodial parent takes the exemption for the children who lived with them. But check your divorce decree to see if it specifies otherwise. Non-custodial parents can claim one or more of their children, either by decree or consent of the custodial parent (Form 8332).

Deciding who should claim dependents is tricky. Once again, you can be very strategic if you are talking to each other and the goal is for the two of you as a whole to pay the least amount of tax allowable. If communication with your ex is not possible you'll probably have to adhere to whatever the divorce decree states.

Why strategize? There are many tax benefits that can be tied to a dependent, if you are entitled to them. And often one parent is entitled while the other is not, so you need to strategize. The major benefits that are at stake are:

- Dependency Exemption
- Child Tax Credits (for kids under 17)
- Head of Household Status
- Credit for Child and Dependent Care Expenses
- Exclusion for Dependent Care Expenses (Form 2441)
- Earned Income Credit
- Education Credits or Deductions

For example, let's say there are two children who are dependents. One is a college student with education expenses that may qualify one of you for an education tax credit of up to $2,000. The other is a high school student under 17 that may be a qualifying child for the Child Tax Credit. Depending on each parent's AGI (Adjusted Gross Income) you will need to determine who would gain the most benefit by taking these dependents. And there are other variables, too detailed to delve into here, besides AGI to consider. Once again, read Publication 504 and any other forms or instructions you are directed to.

Alimony & Child Support

If you pay alimony, make sure you enter it on the appropriate line in the Adjusted Gross Income section of the return. You also need to enter the recipient's social security number. If you receive alimony, make sure you enter it on the appropriate line in the Income section of the return (Line 11 on Form 1040). As this may result in too much money being withheld from the payer's wages and too little from the payee's, you might want to adjust your withholding amounts with your payroll office. Fill out a form 1040-ES to figure out this adjustment.

Child Support is not deductible to the payer and is not income to the payee, so it does not go anywhere on your return.

These are some of the big tax issues facing divorced and separated people. There are many others, so please do your research. With due diligence and patience you can do this. You can also call the IRS helpline at 1 (800) 829-1040 for help with your questions. It's worth a try. If you do it right you will save yourself a big tax preparation fee. And if you get stuck or just don't feel confident, you can then turn to the professionals.